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The numbers in the annual report are not enough. Investors also rely on the accompanying narrative to get the complete picture, as PwC’s Alison Thomas explains

This article was first published in the October 2012 UK edition of Accounting and Business magazine.

What investors and analysts really want from corporate reporting is consistent, coherent and realistic communications that help them to judge how well your company is tackling its challenges and exploiting its opportunities.

The challenge for management is to provide just enough information to give a clear picture of the business without burying key messages and links in a flurry of detail.

Context is everything

The narrative report’s first task is to explain what business the company is in by clearly setting the context in which it operates. What are the key drivers shaping your industry? What are the key challenges and opportunities – regulatory, competitive, and technological – that influence the choices the company needs to make to succeed? In other words, what is the basis of your company strategy and how do you choose to compete?

Don’t assume knowledge of your business model. If you are a shareholder and new to the industry, you need to understand its dynamics and the value creation process. In short, you want to know how the company makes its money.

Know your target audience

If your business is highly leveraged, does your reporting meet the needs of the fixed income community? If you want to attract long-term shareholders, do you help potential investors understand why your company might be an interesting addition to their portfolio? Knowing how your target audience uses the information you provide can often identify simple opportunities to improve the effectiveness of your communications.

Investors often talk about the look and feel of a report. They want reports that reflect the culture of the reporting entity, not the layout preferences of their external design team. A business-like approach is preferred to an excessive emphasis on the glossy.

The missing link

Failure to link key performance indicators (KPIs) to company strategy is a common weakness in reporting. Just as strategic statements need to be set in the context of the company’s market environment, KPIs need to be presented so that the reader can assess whether the company’s game plan is on track.

Linking KPIs to risks and clearly stating the link between executive remuneration and performance against the KPIs also helps companies move ahead of the pack.

In some instances, reporting requirements, or simply the complexity of a business structure, can lead to information on a given topic (such as risk) being scattered around the report. The investment community is clear that navigating through a document can be eased greatly with good cross-referencing.

A tale of two halves

Inconsistencies often arise between the information presented in the front half of the report and the information in the audited back half. Is the picture of performance painted in the narrative review consistent with that portrayed in the back of the report?

A lack of a cohesive message between the front and back halves can create confusion and affect the entity’s valuation. Perhaps more importantly, it can reflect badly on management: it might indicate a lack of joined-up thinking and controls within the entity, or even an intention by management to mislead the market.

Stand out from the crowd

Whatever the industry, companies that are committed to improving their reporting by working hard on the narrative section of their report stand out from the crowd. Focusing on the narrative is a great way to bring together the many people involved in preparing the annual report to provide a fluid and coherent description of your performance in the year.

‘Investor views’ highlights the financial reporting areas of most interest to investors and how to improve those disclosures.

Alison Thomas is a corporate reporting specialist at PwC.

Last updated: 21 Mar 2014